BANKRUPTCY UPDATES

Cosigners in Bankruptcy

Thinking about filing bankruptcy but don't want to affect the finances of your friends and family cosigners?

Read below to see how filing bankruptcy may affect that person.

Fill out the below form to connect with a bankruptcy lawyer to ask him or her specific questions about your loans and a possible bankruptcy filing:

What's a Cosigner?

Cosigners are like the financial equivalent of spotters at the gym - if you can't make your loan payments, your cosigner is generally legally obligated to bail you out by seeing that your loan is repaid.

A cosigner typically has a stronger credit history than the primary borrower, and so helps the borrower qualify for more attractive loan terms.

Bankruptcy and Cosigners

So how are your cosigners (or "codebtors," as they're often called in legal documents) affected if you file bankruptcy? That depends largely on which chapter of the U.S. Bankruptcy Code you file under.

• Chapter 7 Bankruptcy: In Chapter 7, certain debts are completely discharged, meaning that filers do not have to pay them. Because the cosigner literally signed his or her name to a loan to guarantee repayment, he or she is left with the burden repayment.
• Chapter 13 Bankruptcy: In Chapter 13, debts are rearranged and filers make regular payments under a court-ordered repayment plan. As long as the filer follows the plan, cosigners are protected by a "codebtor stay."

Keep in mind that, before you file bankruptcy, any late or missed payments on a loan for which you have a cosigner will likely hurt your cosigner's credit as well as your own. And cosigners for business loans (rather than personal ones) are usually not protected in bankruptcy.

How to Protect Cosigners When Filing Bankruptcy

While a Chapter 13 bankruptcy may benefit your cosigner more than a Chapter 7 bankruptcy would, keep in mind that you have to file under the chapter that works best for your finances and your financial recovery.

Your cosigner signed a legal document guaranteeing payment of a loan and took on considerable responsibility when he or she did so.

Because this can be a delicate matter (especially when family and friends are involved), consider talking with a bankruptcy lawyer about which chapter may best address your financial needs and how to deal with cosigners:

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